Suppose that an individual consumes just hamburgers and soft drinks. Using a carefully-labeled diagram, derive the price-consumption curve that would result from a decrease in the price of hamburgers.
What will be an ideal response?
See Figure 5.11. The initial budget line is given by L1, where the consumer chooses H1 units of hamburgers. A decrease in the price of hamburgers will cause the budget line to pivot to L2. The consumer now chooses to consume H2 units of hamburgers. Connecting the two utility-maximizing bundles yields the price consumption curve.
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Which of the following statements is true?
A) Production in a perfectly competitive market is efficient because resources in the market leave those sectors in which price cannot cover their costs of production and enter those sectors where price can cover their costs of production. B) Production in a perfectly competitive market is suboptimal because absence of free entry and exit of firms allows firms to specialize in only one particular industry. C) Production in a perfectly competitive market is Pareto inefficient because the government or a central planner carefully analyzes the needs and requirements of the society and instructs firms on what to produce and in what quantity. D) Production in a perfectly competitive market is Pareto efficient because the government or a central planner carefully analyzes the needs and requirements of the society and instructs firms on what to produce and in what quantity.
If the price of a good falls, before the amount consumed changes the marginal utility per dollar from that good
A) decreases. B) increases. C) might either increase or decrease depending on whether the good is a substitute or a complement. D) More information is needed to determine the answer.
Cartels are unstable for each of the following reasons except which one?
A) entry by new firms B) the self-interest of each member C) barriers to entry D) the bargaining necessary to form a cartel
The primary goal of supply-side economics is to
a. balance the federal budget. b. reduce the balance of payments deficit. c. reduce the money supply. d. reduce inflation and increase growth at the same time.